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Does Supply Chain Management Software Make Sense in Wholesale Distribution? Part 2: The Critical Objectives

Written By: Mark Wells
Published On: September 12 2001

Does Supply Chain Management Software Make Sense in Wholesale Distribution?

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Executive Summary   

Growing competitive pressures compel strategies and tactics that yield efficiency and efficacy within virtual supply chains. This is especially true for middle tier suppliers. For example, distributors are finding that they need managers who are not only good expediters and know their products, but who also understand how to use decision support tools to make their work more effective. Advances in information technology now make it more feasible for distributors to adopt these tools such as supply chain management software. This paper examines the steel service center segment of the wholesale distribution industry as a case in point of the challenges facing distributors and the relief offered through supply chain software.

This is Part Two of a three-part note. Part One defined the Challenge faced by wholesale distributors. This part discusses the Critical Objectives in meeting this challenge. Part Three covers meeting the objectives with Supply Chain Management Software.

The Critical Objectives   

As anyone in the wholesale distribution business knows, there are some objectives that are critical to removing time and money from operations and enhancing competitive advantage. They include:

  • Optimizing inventory investment

  • Ensuring service

  • Sourcing effectively

  • Maximizing return on assets

The structure of the steel industry provides a detailed perspective for examining the special attention that distributors must pay to these objectives. While steel service centers face some specific concerns, many of the challenges pervade the distribution business in general.

Optimizing Inventory Investment   

A small proportion of the inventory will have some consistency in demand, but for the bulk of the SKU's, demand will often be lumpy or intermittent. Not all steel of a given dimension will have the same quality or properties. For example, hardness, tensile strength, and surface quality may all vary. Inventory supplies for various end uses must have the appropriate properties associated with quality. The inventory is heavy and expensive to transport, so movement should be minimized. Not only must steel service centers manage unprocessed steel (plate, coil, bar, etc.), but OEM's are increasingly asking their steel service centers to hold processed materials (slit coil, cut-to-length, plasma cut patterns, etc.) for just-in-time delivery as well, increasing pressure on margins and taxing their ability to manage inventory.

Ensuring Service   

Achieving the key milestone of quality service remains a non-trivial problem. Simply increasing overall inventory levels is not only unprofitable, but also ineffectual. The right inventory of the appropriate quality needs to move to the right place, at the right time, and at the right cost. This means that raw material purchases must be carefully timed and allocated to the service center locations. Processing schedules must be reliable and flexible. Finished goods inventories must be managed for extremely short delivery lead times and for exacting quality standards. Outbound trucks have to be scheduled precisely, loaded efficiently and routed optimally. Naturally, all shipments should be closely tracked.

Sourcing Effectively   

Careful planning must coordinate purchases with mill rolling schedules while synchronizing supplies with projected demand. Challenges exist here because mill schedules are inflexible and result in relatively infrequent delivery opportunities. As a result, service centers will often need to hold significant levels of inventory. Mill purchases may need to be supplemented with opportunistic purchases from other service centers. Achieving the right blend of procurement opportunities is crucial to profitability and a very significant challenge.

Achieving Return on Assets   

Very expensive, precision equipment is required to handle and process steel. While machines often have some overlapping capabilities, different machines that perform the same function cannot necessarily process the same order. Machinery with more exact tolerances must be used for certain end applications. Also, similar machines often have different processing rates. These factors must be considered when planning long term capacity. If too little capacity exists, then the service center may not be able to respond quickly to changes in demand. If too much exists, then the investment is not producing sufficient return.

Equipment considerations must be carefully, but quickly, evaluated when scheduling operations. Setups should be considered. While separate setup stations are sometimes used to build the setup for the next run, setup time may still be reduced through sequencing jobs in a manner that simultaneously considers tradeoffs among total setup time, demand priority, order due date, penalties for being late, and inventory risk.

This concludes Part Two of a three-part note. Part One discussed the Challenges faced by wholesale distribution. Part Three will cover meeting the objectives with Supply Chain Management Software.

About the Author   

MARK WELLS has worked for the past 20 years on many aspects supply chain management from within industry, as a supply chain consultant, and as part of a software development organization. For two years, he worked for a steel service center as an internal consultant. He holds an MBA from Drexel University where he has also taught operations management and operations research. He currently works for the applications development division of Oracle Corporation, focusing on supply chain planning.

He can be reached at mark.wells@oracle.com.

 
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